Business Succession Planning
We help business owners and creative entrepreneurs plan for the orderly transfer of ownership to the next generation, to trusted business partners, and, sometimes, to a charity. We offer advice and tax-advantaged, cost-effective strategies for accomplishing your business succession goals.
It begins with a thorough understanding of your business, your family, your professional background, and your tax environment. We’ll sit down with you to listen and learn your goals for the succession plan so that our recommendations are specifically tailored to your situation. We’ll address the timing and mechanics of the transition, as well as the protections and rights you can retain during the process.
We recommend that all entrepreneurs have a buy-sell agreement in place for their family business as part of their estate planning. A buy-sell agreement between shareholders, or between the shareholders and the business entity, lays out how ownership shares (or interests) will be transferred in the event an owner dies, becomes disabled, or wants to sell or transfer his or her shares. By providing an orderly mechanism and a timeline for ownership transfer, the agreement gives stability to the business during a time of potential uncertainty. It enables management to reassure business creditors and key business partners of the continuation of the business. And it provides liquidity to fund testamentary dispositions (estate plans involving gifts and trusts).
Essential deal points in a buy-sell agreement
- A restriction on transfer of ownership interests. Sale or transfer of shares can only take place under the buy-sell mechanism
- An agreed mechanism for valuing the shares (e.g., a prearranged price, business appraisal, or a combination of both)
- Triggering events: death, disability, bankruptcy, withdrawal/retirement, termination of employment
- A time frame for completion of the sale
- Payment of purchase price
- Inclusion of the community property interest of nonemployee spouses (the nonemployee spouse must sign)
Optional deal points in a buy-sell agreement
- Mandatory purchase or right of first refusal
- Noncompetition agreement
- Purchase by the business (redemption agreement) or by other owners (cross-purchase agreement)
Funding a buy-sell purchase on the death of an owner
- As part of the planning process, the company purchases and maintains life insurance on the life of each partner in advance; the premium is a deductible business expense (“key employee” insurance).
- The insurance death benefit is paid to the company.
- Alternatively, the other shareholders own the policy, and the death benefit is paid to the purchasing partner.
“Shotgun clauses” can be added to allow 50/50 partners to exit the business relatively quickly and equitably.
Call our office today for an evaluation of your current business succession strategy or to learn how business succession applies to your business.
Frequently Asked Questions
- Why is a living trust so important?
- What does an estate plan consist of?
- When should I revisit my estate plan from many years ago?